British Bank Holds Steady on Rates and Buyback Plan

British Bank Holds Steady on Rates and Buyback Plan
By JULIA WERDIGIER
Copyright by The New York Times
Published: December 10, 2009
http://www.nytimes.com/2009/12/11/business/global/11pound.html?_r=1&ref=global-home


LONDON — The Bank of England kept its benchmark interest rate unchanged on Thursday and decided to stick to its program of buying government bonds, tacit acknowledgement that signs of a recovery remained faint.

The central bank kept the interest rate at 0.5 percent, a record low. The bank has already spent about £185 billion to buy debt in order to stimulate the credit market and can spend another £15 billion (for a total of $325 billion) as part of the program.

“There really is little left for the Bank of England to do other than wait for the recovery to kick in,” Peter Dixon, an analyst at Commerzbank in London, said. He expects the Bank of England to halt asset purchases in February.

The Bank of England governor, Mervyn King, said earlier that he had an “open mind” about whether to expand the program because of concerns that halting the purchases too early could hurt a recovery. On Thursday, the central bank indicated that it would keep the program unchanged until at least February.

The bank expanded the asset purchasing plan last month for a third time after the British economy continued to shrink in the third quarter. The chancellor of the Exchequer, Alistair Darling, repeated Wednesday that he expected the economy to start growing again “by the turn of this year” but he warned of complacency and added that “we must continue to support the economy until recovery is established.”

In contrast, some other countries have already started to scale back emergency stimulus packages. Switzerland’s central bank said Thursday that it would stop buying corporate bonds. The European central bank and the Federal Reserve previously announced plans to wind down emergency stimulus.

The pound rose against the dollar on Thursday after the decisions on the interest rate and asset purchasing program, which were widely expected. A relatively weak pound throughout this year had helped to attract foreign investment and British firms to sell products abroad, easing some effects of the recession.

While some recent economic data indicated that Britain’s economy might have stopped shrinking in the last month, concerns among investors about the country’s large budget deficit remained. Britain plans to issue a record amount of government debt this fiscal year to help its stretched finances.

The government announced some tax increases Wednesday, including a levy on bankers’ bonuses, but less than a year before a general election, it did not identify areas for spending cuts necessary to meet its pledge to half the budget deficit in four years.

A ratings agency, Moody’s Investor Service, said earlier this week that the public finances of both the United States and Britain were testing the boundaries of their credit ratings.

Ireland’s government announced Wednesday that it would cut pay for teachers, nurses and police officers as part of a plan to reduce the budget deficit to 2.9 percent of gross domestic product, from 11.7 percent, by 2014.

Also on Thursday, the South Korean central bank left its key rate unchanged at 2 percent, while Iceland cut its key rate to 10 percent.